Assessing the Impact of Product  Market Reforms in Spain
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Assessing the Impact of Product Market Reforms in Spain

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Comments to the presentation by Pablo Hernández de Cos, Bank of Spain ...

Comments to the presentation by Pablo Hernández de Cos, Bank of Spain
Rafael Doménech
Assessing Product Market Reforms in Programme and Vulnerable Countries
Brussels, November 25, 2013

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Assessing the Impact of Product  Market Reforms in Spain Assessing the Impact of Product Market Reforms in Spain Presentation Transcript

  • Assessing the Impact of Product Market Reforms in Spain Comments to the presentation by Pablo Hernández de Cos, Bank of Spain Rafael Doménech Assessing Product Market Reforms in Programme and Vulnerable Countries Brussels, November 25, 2013
  • Assessing the Impact of Product Market Reforms in Spain November 2013 Main results of Hernández de Cos’ analysis •  The impact of the internal devaluation process on growth and employment depends both on wage moderation and the adjustment in price-cost margins •  Available indicators point to some progress in terms of PMR in Spain, but there is room for improvement (page 12) •  Since 2008 the profit share in NFCs (GOS/GVA) has increased over 5 pp, as in other vulnerable countries. However, this proxy has some pitfalls (capital cost, heterogeneous firms, etc.) •  Markups around 1.2 until 2007 then increased towards 1.3 in 2011. Higher initial markups and debt ratios in 2007 explain the change of markups in 57 sectors •  Regional regulation has been reduced with the 2010 Retail Trade Law, but regulation remains very heterogeneous across regions •  Productivity “duality”: lower productivity than our peer countries for small firms, and comparable productivity for large firms Page 2
  • Assessing the Impact of Product Market Reforms in Spain November 2013 Main results of Hernández de Cos’ analysis •  Main economic policy implications •  Signs of improvements in several dimensions: retail sector, housing, administrative burden •  Need to monitor closely other reforms such as energy sector, judicial system, professional services, etc. •  Need to tackle lack of efficiency in business dynamics and to increase firm size •  This presentation •  analyses a crucial factor for employment growth and structural reforms •  finds very interesting empirical results, and •  offers sound economic policy recommendations Page 3
  • Assessing the Impact of Product Market Reforms in Spain November 2013 Structure of this presentation •  Three main comments •  Markups and prices •  Regional implications of product market regulations •  The effects of PMR on firm size and implications for aggregate productivity •  Other comments •  Concluding remarks Page 4
  • Assessing the Impact of Product Market Reforms in Spain November 2013 1. Markups and prices Markups and aggregate labour demand Aggregate labour demand in the private sector, Spain 2007-2013 Real compensation of wage earner (1T2008=100) Source: BBVA Research and Andrés and Doménech (2013) 112% Employment growth is the most important challenge of the Spanish economy in the short and medium run Aggregate  labour   demand   110% 2T2013 2T2012 108% 106% Although wage rigidities seem to be the most important factor behind employment destruction (movement along the aggregate labour demand) … Markup reduction 4T2012   104% 102% 1T2008 100% … other factors as productivity, capital accumulation and markups are important as well … 98% … particularly for successful results of labour market reforms 96% 94% 75% 1T2007 80% 85% 90% 95% 100% 105% Full-time equivalent employment (1T2008=100) Page 5
  • Assessing the Impact of Product Market Reforms in Spain November 2013 1. Markups and prices Prices and nominal unit labour costs Prices and nominal ULC, 2000-8 and 2009-13 Averages of annual growth of GDP deflator and nominal ULC* Source: AMECO and BBVA Research 8 In any case, the behaviour of markups does not prevent prices (GDP deflator) to respond to changes in unit labour costs ... Growth of GDP deflator (%) 7 2000-8 6 España 2000-8 5 4 ... both in expansions and recessions 3 2 1 2009-13 Spanish evidence fits nicely to other advanced economies: inflation falls when nominal ULC growth diminishes 0 España 2009-13 -1 -2 -2 0 2 4 Growth of nominal ULC(%) 6 8 * Each point in this graph represents EU27 countries and major advanced economies Included in the AMECO database for 2000-8 (blue) and 2009-13 (red). In Spain unit labour costs from 2009 to 2013 are calculated using compensation per wage earner Page 6
  • Assessing the Impact of Product Market Reforms in Spain November 2013 1. Markups and prices The behaviour of markups during the crisis Rolling regression: estimates of price-cost margin 4-year rolling windows, 10% confidence intervals and GMM estimation Source: Hernández de Cos, Bank of Spain (2013) Initial markups and the selection of efficient firms: Have been the most efficient firms with higher markups the ones that have survived? Composition effects may be relevant Financial restrictions and financial fragmentation in Europe Page 7
  • Assessing the Impact of Product Market Reforms in Spain November 2013 1. Markups and prices Implications of financial fragmentation in Europe Price decomposition Source: BBVA Research 1 Assume a tradable good and a common technology, and that the one-price law holds for final goods and intermediate inputs 0.9 0.8 0.7 0.6 wages 0.5 Intermediate inputs Under the assumption of free movements of capital … Debt 0.4 Equity 0.3 … financial fragmentation implies that wages should be lower in countries with higher financial costs 0.2 0.1 0 Core countries Spain Page 8
  • Assessing the Impact of Product Market Reforms in Spain November 2013 2. Regional implications of product market regulations Retail trade regulations and GDP The effects of retail trade regulations on GDP per wap Source: BBVA Research and Think Tank Civismo MAD   27,000 PV   NAV   Retail trade regulation is one of the factors that helps to explain regional performance 25,000 ARA   23,000 RIO   CAT   With only two factors (human capital and retail trade regulations) we can explain 95% on regional variance in GDP per working-age population BAL   21,000 CYL   CAN   VAL   Observed Economic relevance: GDP per wap could be increased 9% on average if other regions improved their retail trade regulations to the level observed in Madrid 29,000 27,000 21,000 With best retail trade regulations 19,000 EXT   GAL   AND   17,000 15,000 AST   25,000 CLM   MUR   17,000 CANT   23,000 19,000 15,000 GDP per working-age population, 2011 29,000 GDP per working-age population explained by fundamentals Page 9
  • Assessing the Impact of Product Market Reforms in Spain November 2013 2. Regional implications of product market regulations Retail trade regulations and unemployment The effects of retail trade regulations on unemployment Source: BBVA Research and Think Tank Civismo 35 CAN EXT AND Observed With best retail trade regulations CLM MUR VAL 25 GAL BAL AST CAT MAD CANT ARA NAV 15 Unemployment rates could be reduced by 4pp on average if other regions improved their retail trade regulations to the level observed in Madrid 29,000 27,000 25,000 23,000 21,000 19,000 PV 17,000 10 Through its effects on productivity, retail trade regulations also affect the unemployment rates RIO CYL 20 15,000 Unemployment rate, 2012 30 Given a common labour market regulation, differences in productivity explain a large share of differences in unemployment rates (62%) GDP per working-age population, 2011 Page 10
  • Assessing the Impact of Product Market Reforms in Spain November 2013 3. PMR, firm size and productivity Firm size and aggregate productivity Firm size and aggregate productivity Source: BBVA Research and OECD ProducLvity  per  hour,  2008,  USA=100   105   IRE 95   BEL USA Firm size is significantly correlated with aggregate labour productivity NLD DEU AUT 85   DNK 75   FRA SWE FIN GBR Composition effect matters: lower productivity than our peer countries for small firms, and comparable productivity for large firms ESP AUS JAP ITA 65   GRE with the firm size distribution of Germany (from micro to large firms), Spain could improve aggregate productivity by 13% (Círculo de Empresarios, 2013) NZL 55   POR 45   5   10   15   20   25   30   35   40   Share  of  employment  in  firms  with  less  than  200  workers,  2006     Page 11
  • Assessing the Impact of Product Market Reforms in Spain November 2013 3. PMR, firm size and productivity Product market regulation and firm size Product market regulation and firm size Source: Cuerpo, Doménech and González-Calbet (2011) Share  of  employment  in  firms  with  less  than  200   workers,  2006   36   GRE POR 32   ITA Firm size is correlated with product market regulation 28   ESP 24   Excessive tendency towards size-dependent policies favouring small-sized firms NZL JAP 20   NLD GBR 16   NOR FRA AUT DEU FIN BEL SWE AUS DNK 12   USA Policies favouring the creation of small firms should be complemented with policies favouring the increase of firm size (correct incentives) IRE 8   0.8   1.0   1.2   1.4   1.6   1.8   Index  of  product  market  regulaLons,  OECD,  2003   Page 12
  • Assessing the Impact of Product Market Reforms in Spain November 2013 4. Other comments Service sector regulation •  As stated by Hernández de Cos, it is important to identify and correct anticompetitive service sector regulation on manufacturing •  The literature has shown that value added, productivity, and export growth in downstream manufacturing sectors suffer from inadequate service sector regulation •  The service sector regulation that matters most relates to energy, professional services, transport, distribution networks and telecommunications •  This has had important effects within OECD countries and evidence is still gathering (see Barone and Cingano, Economic Journal, 2011) Page 13
  • Assessing the Impact of Product Market Reforms in Spain November 2013 4. Other comments Other reforms •  Assessment of the impact of the new institution created to monitor competition: Comisión Nacional de los Mercados y la Competencia •  Hernández de Cos concludes that “there has been significant improvement in red tape: firms administrative burden and costs of starting a business” … … but we lack good information on this and firms still complain about this burden, which can be reduced significantly •  Judicial system efficiency and legal certainty are also extremely important •  The Reform of Public Administration (CORA) •  Very large effects on the performance of the private sector •  Proposed by the central government but its final effects will depend on the willingness of other administrations (regional governments) to coordinate and implement the correct measures Page 14
  • Assessing the Impact of Product Market Reforms in Spain November 2013 Concluding remarks •  Product market reforms are important complementary measures to wage moderation and productivity growth to improve competitiveness and to increase employment creation •  Financial restrictions and financial fragmentation in Europe are relevant factors behind the recent behaviour of markups •  Retail trade regulation is one of the factors that helps to explain regional differences in labour productivity and unemployment rates •  Product market regulations also affect firm dynamics and size •  In order to increase potential growth, Spain also needs to improve service sector regulations imposing best European practices Page 15
  • Assessing the Impact of Product Market Reforms in Spain Comments to the presentation by Pablo Hernández de Cos, Bank of Spain Rafael Doménech Assessing Product Market Reforms in Programme and Vulnerable Countries Brussels, November 25, 2013